Technology is progressive, finance is cyclical

by David Birch

[Dave Birch] You might be familiar with the demise of Northern Rock (or Northern Crock as it is now known the length and breadth of the UK), the collapse that marked the start of the current financial crisis so far as the British were concerned. But you may be less familiar with the story of Benjamin and Abraham Goldsmid who formed a partnership in London at the turn of the nineteenth century. They started off as brokers and as foreign exchange dealers but, as told in E. Victor Morgan’s splendid “A History of Money” (Penguin, revised edition 1969), they moved on and began trading on their own account.

Aaron, the second son of Benedict Goldsmid, of Hamburg, settled in Leman Street, Goodman’s Fields, near Whitechapel Church, as a merchant… His son George was the father of two sons, Abraham and Benjamin Goldsmid, who, by their splendid capacities for business, strict integrity, and singular good fortune, succeeded in raising their firm from competitive obscurity to be the head and front of Change Alley.

[From The Rise of the House of Goldsmid]

They became well known as financiers and philanthropists who, as associates of the British prime minister William Pitt the Younger, provided financial support to the admirable cause of campaigns against the French during the Revolutionary Wars of 1792–99.

They were the first members of the Stock Exchange who competed with the bankers for the favors of the Chancellor of the Exchequer, and succeed in diverting into more legitimate sources the profits hitherto absorbed by the bankers.

[From The Rise of the House of Goldsmid]

I absolutely love that Victorian turn of phrase “diverting into more legitimate sources the profits hitherto absorbed by the bankers” and intend to use it on every occasion possible from now on. Anyway, the Goldsmids began to use short-term bank credit to fund long-term loans, a business that was splendid for some years, until the value of their assets fell in the market (their assets were government bonds) and the partnership collapsed in 1808 with massive debts. Rather than get paid off with a massive golden parachute and a huge pension, as is the fashion today, Benjamin adopted the more honourable exit strategy and hanged himself. His brother Abraham took over the business but then shot himself at Morden Lodge two years later in 1810. One parallel with modern times is that the government were big losers: the partnership owed nearly half a million pounds to the Exchequer (and this was back in the days when half a million pounds was serious money) as well as large amounts to other banks and creditors.

Note that this case of the Goldsmids is not “similar” to that of the Crock, nor is it “analagous” to it, nor is it a “metaphor” for it. It was exactly the same. In every respect. Except that the Goldsmid’s shareholders got most of their money back.

The Goldsmid firm subsequently made great efforts to discharge their liabilities. By 1816 they had paid fully fifteen shillings on the pound; and in 1820 Parliament, on the petition of the creditors, annulled the remaining portion of the debts.

[From - GOLDSMID:]

The case of the Goldsmids would suggest to a casual observer that it’s as if no-one in the business of money had learned a single thing in the last two hundred years. The same cannot be said of the technology of money. In that world, no-one has forgotten how to use a magnetic stripe to make a credit card or how to print a cheque book. When cheques go away, it will be because we don’t want them any more, not because we can’t figure out how they work. Therefore, innovation in money has an unpredictable course, as the step-by-step evolution of technology interconnects with the with cycle of finance. There’s a relationship, which I don’t pretend to understand, between the size of the evolutionary steps and where in the cycle the interconnection occurs.

Of current interest, naturally, is what happens when a large evolutionary step (to mobile phones) intersects with the business cycle in an extreme downturn. An article in The Economist suggests that recession is a stimulus for innovation because large organisations (eg, banks) retreat to their core businesses, leaving the exploitation of new technologies to new entrants staffed by their now ex- employees.

It will be no surprise if some of the talented people now unable to find work in an investment bank or other big company are to direct their energies towards creating a new generation of successful start-ups.

[From Start-ups and slow-downs | Start-ups and slow-downs | The Economist]

This argument suggests to me that wise bankers might be looking to invest in mobile finance initiatives started by out-of-work bankers rather than spend the money on their own R&D. If I have interpreted these fragments at all intelligently.

Incidentally, I came across a picture of Abraham Goldsmid in the National Portrait Gallery. I’d show it to you here but their web site has some twaddle about licensing that I couldn’t be bothered to read. So here’s the link, I’ll leave it to you to wonder if their licensing scheme helps or hinders the arts, sciences or commerce.

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

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